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A penalty tax inequity in the Reid bill

Under Leader Reid’s amendment, in the year 2019 about 16 million U.S. citizens would be uninsured and be forced to pay a penalty tax of almost $800 per year. About eight million illegal aliens would be uninsured and would owe no penalty tax. Both groups would get their health care through a combination of out-of-pocket spending and use of uncompensated care in emergency rooms and free health clinics.

This seems unfair.

Details follow for those who care. Warning: the details get weedy quickly. You might want to skip them. I am including them mostly for experts and reporters who may want to follow up on this. If you are a policy amateur but have been reading this blog for more than a week or two, feel free to dive in. You can handle the complexity.

If you want to know my guess about why the Reid amendment has this problem, please skip to the last section of this post.

Background

Both the House and Senate bills require applicable individuals to buy health insurance. If you are an applicable individual and you do not have insurance, you pay a penalty tax to the IRS. The taxes are different:

House bill: roughly 2.5% of adjusted gross income;

Senate bill: $750 per person in 2016, with smaller phase-in amounts in 2014 and 2015.

Each bill defines exceptions to the term applicable individual. I will focus on the exceptions related to citizenship and presence in the United States.

Thanks to help from some smart friends, here is how I read the language:

Do the individual mandate and penalty tax apply?

Uninsured U.S. citizen

Uninsured and not a citizen

Living in the U.S.

Living outside the U.S.

Legally in the U.S.

Illegally in the U.S.

Resident in the U.S.

Not resident in the U.S.

Resident in the U.S.

Not resident in the U.S.

House-passed

Yes

No

Yes

No

Yes

No

Reid amendment

Yes

Yes

Yes

??

No

??

This table is more complex than I would like, in part because of the different approaches in the two bills.

The key is the comparison of the two red cells. Under the Reid amendment, beginning in 2011:

If you are a U.S. citizen living in the U.S. and you are uninsured, you pay the penalty tax.

If you are illegally in the U.S. and you are uninsured, you do not pay the penalty tax.

In 2016 the Reid amendment’s penalty tax (with some exceptions) is $750 per person. It phases up from $95 in 2014 and $350 in 2015. By 2019, the penalty tax would be $794 per person (using CBO’s inflation assumptions.)

CBO says that, in 2019 under the Reid amendment there would be about 24 million uninsured people, “about one-third of whom would be unauthorized immigrants” (p. 8). So there would be about 16 M people in the Yes boxes, and about 8 M in the No box.

Legislative language

The key language is in section 5000(A)(d)(3), as would be added by section 1501(b) of the Reid amendment: “…

[applicable person] shall not include an individual … if the individual is not … an alien lawfully present in the United States.” The double (triple?) negative makes the full sentence somewhat more confusing. You can find it below.

To quote one of my smart friends, The words “not lawfully present in the United States” are the magic phrase that legislative counsel uses to identify those we colloquially refer to as illegal immigrants.

(a) REQUIREMENT TO MAINTAIN MINIMUM ESSENTIAL COVERAGE. An applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.

(b) SHARED RESPONSIBILITY PAYMENT.

(1) IN GENERAL. If an applicable individual fails to meet the requirement of subsection (a) for 1 or more months during any calendar year beginning after 2013, then, except as provided in subsection (d), there is hereby imposed a penalty with respect to the individual in the amount determined under subsection (c).

[ skip to page 329 ]

(d) APPLICABLE INDIVIDUAL. For purposes of this section —

(1) IN GENERAL. The term “applicable individual” means, with respect to any month, an individual other than an individual described in paragraph (2), (3), or (4).

(2) RELIGIOUS EXEMPTIONS. …

(3) INDIVIDUALS NOT LAWFULLY PRESENT. Such term shall not include anindividual for any month iffor the month the individual is not a citizen or national of the United States or an alien lawfully present in the United States.

(4) INCARCERATED INDIVIDUALS. Such term shall not include an individual for any month if for the month the individual is incarcerated, other than incarceration pending the disposition of charges.

(d)(3) would benefit greatly from some parentheses. It’s easiest to understand if you just look at its title: individuals not lawfully present are an exception to applicable individual in (1). Colloquially, this means that illegal aliens are not applicable individuals subject to the shared responsibility payment in (b)(1).

Why did they do this?

I also would not be at all surprised if most Senators do not yet understand this consequence. Complex policy changes often end up with a few of these cul-de-sacs, and they can cause the proponents serious heartburn. The staff who drafted the bill certainly do understand this.

Assuming this isn’t just an oversight, the bill drafters were forced into a no-win choice. Here is my guess.

They decided to include an individual mandate. To make the mandate effective, they had to include a penalty tax for noncompliance.

The problem is that some people will ignore the mandate and pay the penalty tax. CBO says that some of these people are rational: the cost of insurance is greater than the penalty tax, so they choose to remain uninsured.

CBO says others are irrational. For them, the calculation suggests they “should” be better off by purchasing insurance, but for whatever reason they choose not to.

The penalty tax can be thought of in three different ways:

It’s an incentive to get people to comply with the mandate. The bill drafters almost certainly don’t want people to end up uninsured and paying a penalty tax. They want the incentive to encourage everyone to buy health insurance.

It’s a penalty for those who ignore the mandate. This is closely related to the incentive, but a slightly different concept.

It’s a free-rider fee for those who go uninsured and free ride on emergency rooms and free clinics.

Now, what should they do about illegal aliens? Assuming they need an individual mandate, they have four policy options, which I’ll label A, B, C, and D:

How should illegal aliens be treated?

Mandate & penalty tax apply?

Yes

No

Eligible for insurance & subsidies?

Yes

A

B

No

C

D

Each option has serious downsides.

Option A: Illegal aliens are treated like U.S. citizens. They can buy insurance through exchanges, receive subsidies, and are subject to the mandate and penalty tax.

Problem: Most Members of Congress don’t want to subsidize illegal aliens.

Option B: Illegal aliens can buy insurance through exchanges, receive subsidies, but are not subject to the mandate and penalty tax.

This is even less acceptable to those Members who reject option A. Illegal aliens would be treated better than U.S. citizens.

Option C: Illegal aliens cannot buy insurance through exchanges or receive subsidies. The mandate and penalty tax apply to them if they do not have insurance.

If you think of the penalty tax as an incentive or a penalty for those who choose to go without insurance, then this option doesn’t work, because you’re not giving illegal aliens an option to comply with the mandate.

If, however, you think of the penalty tax as a free-rider fee, in which those without insurance are, in effect, paying the government to cover the costs they impose on the uncompensated care system, then this option is OK.

Option D: Illegal aliens cannot buy insurance through exchanges or receive subsidies. The mandate and penalty tax do not apply to them.

This is what the Reid amendment does.

If you think of the penalty tax as an incentive or a penalty, then this option makes sense. Since they cannot buy insurance, it’s “fair,” some would argue, not to penalize them for a choice they don’t have.

If, however, you think of the penalty tax as a free-rider fee, then the inequity with U.S. citizens who remain uninsured causes an apparent fairness problem. I highlight this inequity in the title and opening paragraph of this post.

I am not too surprised that a bill drafted to keep the Left happy would choose option D. I don’t know how well it will sit with the swing votes Leader Reid needs to hold 60.

For the record, I would choose option E: no individual mandate. The above problem goes away, but with even bigger consequences for the legislation. Leader Reid needs the mandate to make his bill work, so he is stuck with the other four bad options.

Are the moderate/nervous Democratic Senators comfortable voting for (or to begin debate on) a bill that appears to treat uninsured American citizens more harshly than it treats uninsured illegal aliens?